TOPPLING OFF THE FISCAL CLIFF: WHOSE TAXES RISE AND HOW MUCH?

Roberton Williams, Eric Toder, Donald Marron, and Hang Nguyen Urban Institute and Urban-Brookings Tax Policy Center October 1, 2012
ABSTRACT

The fiscal cliff threatens an unprecedented tax increase at year end. Taxes would rise by more than $500 billion in 2013an average of almost $3,500 per householdas almost every tax cut enacted since 2001 would expire. Middle-income households would see an average increase of almost $2,000. Policymakers are rightly concerned about the potential impact on families and the economy of such a sudden tax increase and are considering proposals to delay, repeal, or offset parts of the cliff. To inform that discussion, this report provides a detailed look at the revenue, distributional, and incentive effects of these increases. Almost 90 percent of Americans would see their taxes rise if we topple off the cliff. For most households, the two biggest increases would be the expiration of the temporary cut in Social Security taxes and the expiration of the 2001/2003 tax cuts. Households with low incomes would be particularly affected by the expiration of tax credits expanded or created by the 2009 stimulus. And households with high incomes would be hit hard by the expiration of the 2001/2003 tax cuts that apply at upper income levels and the start of the new health reform taxes. Taken together, the scheduled changes would significantly increase the marginal tax rates that can influence behavior. Average marginal tax rates would increase by 5 percentage points on labor income, by 7 points on capital gains, and by more than 20 points on dividends. _____________ The authors thank Jeff Rohaly and Joe Rosenberg for modeling the tax changes and making tables; Tim Meko for creating the figures; Blake Greene for formatting the entire paper; and Bill Gale, Jim Nunns, Steve Rosenthal, Kim Rueben, and Chris Sanchirico for helpful comments on earlier drafts.

TOPPLING OFF THE FISCAL CLIFF: WHOSE TAXES RISE AND HOW MUCH? The United States is fast approaching what many observers call the fiscal cliff. If the president and Congress do not act, taxes would jump for most Americans and government spending would drop sharply.1 Those changes would reduce the federal deficit significantly in 2013 and subsequent years, slowing America's build-up of debt and reducing debt as a share of gross domestic product. But the resulting macroeconomic tightening could well push the country back into recession in 2013 (Congressional Budget Office 2012a). Lawmakers could soften that nearterm hit by delaying or repealing provisions in the "cliff" or by enacting other spending and tax policies that would provide offsetting support for the economy. To provide context for these policy discussions, this report provides a detailed look at the pending tax increases and documents their potential effects on federal revenue, the distribution of the tax burden, and economic incentives. Our findings are as follows: Absent legislative action, most tax cuts enacted since 2001 will expire on January 1, 2013, raising tax rates, reducing deductions and credits, and throwing millions of taxpayers onto the alternative minimum tax (AMT). The estate tax would hit more than ten times as many estates as in 2012. The 2 percentage point cut in the payroll tax rate would lapse, raising taxes on more than 120 million households with workers.2 Short-term tax breaks that Congress regularly renews, some of which have already lapsed, would disappear, boosting taxes for both individuals and businesses. And the 2010 healthcare legislation would impose new taxes on high-income taxpayers. Federal tax collections would jump by more than $500 billion in 2013, more than 20 percent above what they would be without the cliff. Nearly 90 percent of all households would face tax increases averaging nearly $3,500. Middle-income taxpayers would see an average increase of almost $2,000. For both policy and political reasons, it is important to distinguish among distinct aspects of the fiscal cliff. o The expiring cut in Social Security taxes was always intended as a temporary stimulus measure. Policy debate has thus been about when it would expire, not whether. o In contrast, most policymakers favor extending the higher exemption for the alternative minimum tax (the patch, which expired at the end of 2011) and most of the 2001/2003 tax cuts (all except those that apply to taxpayers whose incomes fall above the thresholds that President Obama has used to identify high-income taxpayers$250,000 for married couples and $200,000 for others). o Policymakers generally agree on the need to address the estate tax and the extenders (a diverse group of temporary tax breaks, mostly business but some individual), but they differ on specifics.
1

The spending cuts in the fiscal cliff include the across-the-board sequesters required by the Budget Control Act of 2011, expiration of extended unemployment insurance benefits, and reduced physician payment rates in Medicare (Congressional Budget Office 2012a, 2012b). 2 This analysis examines the effects of scheduled tax changes on tax unitsindividuals or couples who either file tax returns or would do so if they had enough income. Tax units are not exactly the same as households, but the two terms are used interchangeably in this discussion for expositional simplicity.

o The most disputed provisions in the cliff are the expiring tax cuts for high-income households and the expiring 2009 tax credit expansions that primarily benefit low-income households. The new taxes created by 2010s health reform legislation are also controversial as part of the broader disagreement about that law. The components of the fiscal cliff have different effects on households at different income levels. o For most households, the two biggest increases would be the expiration of the temporary cut in Social Security taxes and the expiration of the 2001/2003 tax cuts. o Households with low incomes would be particularly affected by the expiration of the credits expanded or created by the 2009 stimulus. o Households at the highest income levels would be particularly affected by expiration of the 2001/2003 tax cuts that apply to upper income levels and by the new health reform taxes. o Upper middle-income households would be particularly affected by the expiration of the AMT patch. In addition to raising average tax rates, the fiscal cliff would substantially raise marginal tax rates, which can have an important impact on taxpayer behavior. The average marginal tax rate would increase by about 5 percentage points on wages and salaries, by about 5 percentage points on interest income, by about 7 percentage points on long-term capital gains, and by more than 20 percentage points on qualified dividends. If investors believe it will actually happen, the pending increase in the capital gains tax rate could induce them to sell appreciated stocks, bonds, and other assets before the end of 2012. That would create a temporary spike in realizations, much as happened in 1986. Impending Tax Increases Federal taxes are scheduled to rise in 2013 for six reasons.3 First, most of the Bush-era tax cuts that were enacted in 2001 and 2003 and extended for an additional two years at the end of 2010 are again set to disappear. Second, some of the temporary tax cuts that were part of the American Recovery and Reinvestment Act of 2009 (ARRA) and also extended at the end of 2010 will expire. Third, Congress has not acted on dozens of short-term tax breaks that are regularly extended. Fourth, the payroll tax cut, always intended to be temporary, is set to expire after a two-year run. Fifth, new taxes enacted in 2010s Affordable Care Act (ACA) will take effect in tax year 2013. Finally, the AMT patch that protects tens of millions of taxpayers from additional taxes expired at the end of 2011. Unless Congress extends the patch retroactively, many taxpayers will owe AMT on their 2012 tax returns (the tax returns that people will file in early 2013).

Throughout this paper, we refer to the tax changes scheduled for January 1, 2013, as tax increases. That makes sense, given our focus on how taxes in 2013 would compare to their current levels. Those changes are not tax increases, however, for purposes of federal budgeting. The federal budget process focuses on how future taxes compare to what is implied by already enacted law. Under current law, the upcoming tax changes reflect expiration of temporary tax cuts or, in the case of the health reform taxes, the initiation of previously enacted taxes. Because the scheduled changes are not treated as tax increases, legislation to avoid any of them would be scored as a tax cut.

Bush-Era Tax Cuts. Tax cuts enacted in the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) were all given limited life spans in order to get them through Congress without requiring a superBox 1 Expiring Provisions from the Bush-Era Tax Cuts
Tax reductions contained in the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) were originally scheduled to expire at the end of 2010, but the Tax Relief Unemployment Insurance Reauthorization and Job Creation Act of 2010 (TRUIRJCA) extended those provisions for two years. Most of those tax cuts will expire at the end of 2012 if Congress and the president cannot agree to extend them. The major expiring individual provisions include the following.* 1. Reduced tax rates. EGTRRA lowered tax rates for the top four tax brackets and created a new 10 percent bracket for the first dollars of taxable income (table 1). 2. Repeal of the limitation on itemized deductions (Pease) and the phaseout of personal exemptions (PEP). EGTRRA phased down these provisions in stages and repealed them entirely in 2010. Pease (named for the congressman who proposed the provision) reduced a taxpayers itemized deductions by 3 percent of adjusted gross income (AGI) over a single indexed threshold for all taxpayers but not by more than 80 percent. PEP reduced personal exemptions by 2 percent for each $2,500 of AGI (or part thereof) above specified thresholds. 3. Increased tax benefits for families with children. EGTRRA doubled the child credit from $500 to $1,000, expanded its refundability, and increased the child and dependent care credit. 4. Reduced marriage penalties. EGTRRA set both the standard deduction and the width of the 10 percent and 15 percent tax brackets for married couples filing joint income tax returns at twice those for single filers. It also raised the threshold at which the earned income tax credit (EITC) begins to phase out for married couples. 5. Reduced Taxes on Long-Term Capital Gains. JGTRRA phased out taxes on long-term capital gains (profits on the sale of assets held at least one year) for taxpayers in the 15 percent tax bracket and below and reduced the rate from 20 percent to 15 percent for other taxpayers. Previous rates were 10 percent for the former group and 20 percent for the latter. 6. Reduced Taxes on Qualified Dividends. JGTRRA reduced the tax on qualified dividends from the rates on ordinary income (as high as 39.6 percent before and 35 percent after EGTRRA) to the rates applicable to long-term capital gainsa maximum rate of 15 percent. * The Tax Policy Centers (TPC) Tax Policy Briefing Book describes these tax cuts in greater detail at: http://www.taxpolicycenter.org/briefing-book/background/bush-tax-cuts/index.cfm Note: EGTRRA phased out the estate tax over ten years. TRUIRJCA resurrected the tax with a higher exemption and lower rate than had previously applied.

majority vote in the Senate. Subsequent attempts to make the provisions permanent generally failed, and most of them were scheduled to expire at the end of 2010. In December of that year, the Tax Relief Unemployment Insurance Reauthorization and Job Creation Act of 2010 (TRUIRCA) extended all of the provisions for an additional two years. Absent congressional action, most EGTRRA and JGTRRA provisions will expire at the end of 2012 (box 1).4 Expiration of the Bush-era tax cuts would increase tax rates on most ranges of ordinary income and on long-term capital gains and qualified dividends. Elimination of the 10 percent bracket would raise pre-credit tax liability for everyone with taxable income, and rate increases for the top four tax brackets would boost tax bills for highincome households. Married couples would generally pay more tax because their 15 percent tax bracket would narrow and their standard deduction would be lower. Families with children under age 17 would lose half of their child credit and many would get smaller earned income and childcare credits. And high-income taxpayers would pay more tax as the reappearance of Pease and PEP would raise their taxable income.

Table 1 2013 Federal Individual IncomeTax Rates, Standard Deduction, and Personal Exemption under Alternative Tax Rules
Taxable Income Over But not over 0 8,900 36,150 87,550 182,600 397,000 0 17,800 60,350 72,300 145,900 222,300 397,000 0 12,700 48,400 125,000 202,450 397,000 Tax Cuts Extended 10% 15% 25% 28% 33% 35% Tax Cuts Expire 15% 15% 28% 31% 36% 39.6% 15% 15% 28% 28% 31% 36% 39.6% 15% 15% 28% 31% 36% 39.6% 6,050 10,150 8,900 3,850

Single 8,900 36,150 87,550 182,600 397,000 ---

Married Filing Jointly 17,800 10% 60,350 15% 72,300 15% 145,900 25% 222,300 28% 397,000 33% --35% Head of Household 12,700 10% 48,400 15% 125,000 25% 202,450 28% 397,000 33% --35% 6,050 12,100 8,900 3,850

Standard Deduction Single: Married Filing Jointly: Head of Household: Personal Exemption: Source: Tax Policy Center

Obama-Era Tax Cuts. Three of the tax provisions in ARRA cut 2009 and 2010 taxes for some low-income families by increasing the child credit and the EITC, and EXPANDED credits available to households with students in college. The 2010 tax act extended those provisions through 2012 but they are now scheduled to expire in 2013 (box 2). The Estate Tax. EGTRRA phased out the estate tax over ten years, raising the effective exemption in stages from $675,000 in 2000 (then scheduled to increase to $1 million by 2006) to $3.5 million in 2009 and lowering the top tax rate from 55 percent to 45 percent before eliminating the tax entirely for tax year 2010 only. Pre-EGTRRA provisions were scheduled to resume in 2011. TRUIRCA delayed expiration of the EGTRRA tax cuts, restoring the tax at a lower rate and a higher exemption than in 2009. It set the exemption at $5 million (indexed for inflation) and the top rate at 35 percent for 2011 and 2012.5 If Congress fails to extend these
4

TPCs Tax Policy Briefing Book describes these tax cuts in greater detail at: http://www.taxpolicycenter.org/briefing-book/background/bush-tax-cuts/index.cfm 5 TRUIRCA also set those parameters for the estates of people dying in 2010 but gave executors the option of paying no estate tax and accepting the modified carryover basis rules originally provided in EGTRRA. Those rules set the basis of inherited

provisions, the effective exemption would drop from more than $5 million (indexed for inflation) to $1 million (unindexed), the top tax rate would increase from 35 percent to 55 percent, and surviving spouses would no longer be allowed to claim the exemption not used by the spouse who died. Temporary Increase in AMT Exemption. The AMT operates parallel to the regular tax and sets a floor on total tax liability. Taxpayers whose income exceeds the AMT exemption must calculate both regular tax and AMT liabilities and pay the larger amount. 6 EGTRRA temporarily increased the AMT exemption to preclude the alternative levys reducing the impact of other tax cuts in the legislation. Since then, Congress has repeatedly patched the AMT by setting higher exemptions but only for a year or two at a time. The most recent patch, enacted in 2010, covered tax years 2010 and 2011 and raised the 2011 exemption from $45,000 to $74,450 for couples and from $33,750 to $48,450 for others. If Congress does not enact another patch and extend it retroactively to the current year, the AMT will hit tens of millions more taxpayers, boosting their 2012 tax liability substantially. Box 2 Expiring Obama-Era Tax Cuts
1. Expand the Earned Income Tax Credit (EITC) for Larger Families and Married Couples. The American Recovery and Reinvestment Tax Act of 2009 (ARRA) increased the EITC wage subsidy rate from 40 percent to 45 percent for families with three or more children and increased the start of the credit phaseout range for married couples filing joint tax returns to $5,000 more than that for single workers, up from $3,000 under previous law. (The threshold for couples would revert to that for other filers if the Bush-era tax cuts expire as scheduled.) 2. Increase Refundability of the Child Tax Credit. Families can claim a child tax credit (CTC) of up to $1,000 per child under age 17. If the credit exceeds taxes owed, families can receive some or all of the balance as a refund, known as the additional child tax credit (ACTC). The ACTC is limited to 15 percent of earnings above a threshold$12,550 in 2009 (indexed for inflation). ARRA lowered that threshold to an unindexed $3,000, making the ACTC available to more working parents and increasing its value for others. (The maximum credit would fall by half if the Bush-era tax cuts expire as scheduled.) 3. Replace the Hope Credit with the American Opportunity Credit (AOTC). ARRA replaced the Hope credit for college students with the AOTC for two years. The change increased the number of years a student could claim the credit from two to four, raised the maximum credit from $1,800 to $2,500, and made the credit 40 percent refundable (i.e., taxpayers could claim as much as 40 percent of the credit in excess of their positive tax liability). If the change is not extended, tuition credits would cover less college cost for fewer years and would no longer be refundable.

property at the smaller of the decedents basis or its fair market value when the decedent died. The executor could, however, step up the basis of chosen assets by a total of $1.3 million plus an additional $3 million for assets left to a surviving spouse. 6 TPCs Tax Policy Briefing Book describes the AMT in greater detail at: http://www.taxpolicycenter.org/briefing-book/key-elements/amt/index.cfm.

Temporary Payroll Tax Cut. The 2010 tax act reduced the rate for the employees share of the payroll tax supporting Social Security from 6.2 percent to 4.2 percent for calendar year 2011. Subsequent legislation extended the rate cut for another year. The rate cut will expire at the end of 2012, returning the tax rate to its permanent level. Taxes Created by the 2010 Health Care Legislation. The ACA imposed new taxes to help finance new healthcare provisions. Starting in 2013, high-income taxpayers will pay an additional 0.9 percent tax on their earnings above specified thresholds$250,000 for married couples and $200,000 for others.7 That would raise from 2.9 to 3.8 percent the combined tax rate that these high-income households and their employers pay on earnings above the thresholds. High-income households will also pay an additional 3.8 percent tax on capital gains, dividend, and interest income over the same thresholds.8 In addition, the ACA increased the AGI threshold for deducting medical expenses from 7.5 percent to 10 percent for non-elderly taxpayers. Extenders. Many short-term tax provisions that Congress regularly extends, known as extenders, have either already expired or will expire by the end of 2012. Most of the provisions affect businesses, but some involve individual taxes. The individual provisions cover a broad range of issues, from the deductibility of state and local sales taxes to the adoption credit and the deduction for qualified education expenses. The business provisions include the research and experimentation credit, the work opportunity tax credit, and many other targeted incentives. In addition, the temporary bonus depreciation provision will expire for new investments. That provision allowed companies to expense the full cost of qualified machinery and equipment in 2011 (50 percent in 2012) rather than claiming deductions for depreciation over time. Some of the impending tax increases affect taxpayers independently of others, but many interact. For example, expiration of the temporary payroll tax cut does not affect the amount of income tax that households would pay. In contrast, the AMT would affect fewer taxpayers if other individual income tax cuts expire (because higher regular taxes make AMT liability less likely) and thus reduce the amount of revenue the AMT would collect. Overall Effects of the Fiscal Cliff Estimates from the Tax Policy Center and the Joint Committee on Taxation indicate that if all the tax increases scheduled for January 1, 2013, take effect, and if the AMT patch is not extended through 2013, tax liability will increase by $536 billionor about 21 percentin 2013, relative to the taxes people would owe if all pending tax increases were postponed. This estimate takes account of estimated short-run behavioral responses to higher marginal income tax rates and increased taxation of realized capital gains.9 Taxes would rise throughout the income distribution, but the increase would vary among income groups (table 2 and figure 1). The average federal tax rateincluding individual income taxes, payroll taxes, corporate income taxes, and estate taxeswould increase from 19 percent to 24
7

Because the tax will apply only to earnings above the relevant threshold, affected taxpayers will not face a large jump in taxes as soon as their earnings exceed the threshold. 8 The 3.8 percent tax applies to the smaller of investment income and the excess of AGI over the thresholds $250,000 for married couples filing joint tax returns and $200,000 for others. Limiting the investment subject to tax in that way prevents taxpayers from facing substantial tax increases over a short income range at the threshold. 9 The revenue estimate takes account of short-run behavioral changes but does not consider macroeconomic effects. The distributional effects discussed below do not include either of those effectsthey are static estimates.

percent. The average tax burden would increase by almost $3,500 per tax unitroughly 5 percent of pretax income. In the middle quintile, tax burdens would increase by an average of almost $2,000just short of 4 percent of pretax income. Every income group would see taxes rise by more than 3.5 percent of pretax income. Upper income taxpayers would experience the largest tax increases, both in absolute terms and as a percentage of income. The top quintile would see its tax burden rise by slightly over $14,000 per tax return, almost 6 percent of pretax income. Taxpayers in the top 1 percent of the distribution would experience an average tax increase of over $120,000, slightly over 7 percent of their pretax income.

Table 2 Distribution of Federal Tax Change by Cash Income Percentile, 2013 Tax Units Cash Income Percentile Number (thousands) Percent of Total Share of Total Federal Tax Change 3.1 8.2 11.4 16.9 60.3 100.0 Average Federal Average Tax Rate Federal Tax Complete Change Change Fiscal Cliff (dollars) (% points) (percent) 412 1,231 1,984 3,540 14,173 3,446 3.7 4.1 3.8 4.2 5.8 5.0 4.3 12.1 17.8 21.6 30.9 24.3

Percent Change in After-Tax Income

Lowest Quintile Second Quintile Middle Quintile Fourth Quintile Top Quintile All Addendum 80-90 90-95 95-99 Top 1 Percent Top 0.1 Percent

40,520 36,208 31,370 26,062 23,189 158,260

25.6 22.9 19.8 16.5 14.7 100.0

-3.7 -4.5 -4.4 -5.1 -7.7 -6.2

11,692 5,736 4,615 1,147 117

7.4 3.6 2.9 0.7 0.1

-6.3 -6.3 -6.9 -10.5 -11.8

13.6 8.7 12.6 25.4 13.6

6,359 8,271 14,871 120,537 633,946

5.1 5.0 5.2 7.2 7.9

24.9 26.7 29.9 38.4 40.5

Source: Urban-Brookings Tax Policy Center Microsimulation Model (version 0412-7). Number of AMT Taxpayers (millions). Baseline: 4.0 Proposal: 21.7 Notes: Includes both filing and non-filing units but excludes those that are dependents of other tax units. Tax units with negative cash income are excluded from the lowest income class but are included in the totals. For a description of cash income, see http://www.taxpolicycenter.org/TaxModel/income.cfm .

The tax increases include higher marginal tax rates that could, if sustained over time, adversely affect incentives to work and save and would encourage taxpayers to claim more deductions and exemptions. Average effective marginal tax ratesthe tax paid on the last dollar of income, which most affects taxpayer decisionswould rise by about 5 percentage points on wages and salaries and on interest income, by about 7 percentage points on realized capital gains, and by more than 20 percentage points on qualified dividends (table 3). Average marginal tax rates would increase for every income group, but would increase the most at the very highest income levels. Taxpayers in the 80th to 99th percentiles would experience somewhat smaller increases in marginal tax rates because many would become newly subject to the alternative minimum tax when the AMT patch expires. Effects of Separate Provisions Congress may choose to avoid some of the scheduled tax increases and not others. The separate provisions have very different effects in total and across income groups. Furthermore, the measured effect of the different tax increases depends on the order in which they are considered because the provisions interact with one another. The size of these interaction effects, however, varies among different groups of provisions. The effects of some provisions are independent of others. The tax increases resulting from expiration of the payroll tax cut, 2009 expansions in refundable credits, the estate tax changes, and most of the extenders are independent of each other and also largely independent of changes in other income tax provisions. They would raise households tax bills by the same amount, regardless of whether other tax increases occur. But there are substantial interactions among

other provisions. Most obviously, estimating the impact of not patching the AMT before other tax increases would make its effects appear much larger than if it is applied after other changes have raised regular tax liabilities. And the estimated tax increase from allowing the Bush-era tax cuts to expire would be much larger if the AMT patch were extended than if significant portions were allowed to expire.
Table 3 Distribution of Average Effective Marginal Tax Rates by Cash Income Percentile, 2013 Panel A: Average Effective Marginal Tax Rate on Wages and Salaries Individual Income Tax Cash Income Percentiles Tax Units (thousands) Complete Fiscal Cliff Change (% points) Individual Income plus Payroll Tax Complete Fiscal Cliff Change (% points)

Baseline

Baseline

Lowest Quintile Second Quintile Third Quintile Fourth Quintile Top Quintile All
Addendum

40,520 36,208 31,370 26,062 23,189 158,260

-1.0 16.7 18.3 18.5 28.4 22.2

3.2 18.0 20.1 23.7 32.0 25.6

4.1 1.2 1.8 5.2 3.6 3.4

12.0 29.6 31.0 31.3 35.8 32.5

18.0 32.7 34.7 38.4 40.5 37.4

6.1 3.1 3.7 7.1 4.7 4.9

80-90 90-95 95-99 Top 1 Percent Top 0.1 Percent

11,691 5,736 4,614 1,147 117

24.3 26.8 31.6 32.8 34.4

27.5 28.1 34.2 39.9 40.3

3.2 1.4 2.5 7.1 5.9

35.2 35.3 36.8 35.9 37.3

39.9 37.8 40.2 44.0 44.1

4.7 2.5 3.4 8.1 6.8

Panel B: Average Effective Marginal Individual Income Tax Rate on Long-Term Capital Gains, Qualified Dividends, and Interest Income Long-term Capital Gains Cash Income Percentiles Tax Units (thousands) Complete Fiscal Cliff 1.5 3.1 9.6 13.0 22.3 20.9 Change (% points) 0.5 2.5 6.3 7.2 7.5 7.2 Qualified Dividends Complete Fiscal Cliff 2.0 7.7 18.2 24.3 37.3 34.2 Change (% points) 1.1 6.9 13.0 15.8 21.8 20.3 Interest Income Complete Fiscal Cliff 3.7 9.1 19.1 24.5 33.7 26.7 Change (% points) 1.2 2.4 3.0 4.0 6.5 5.1

Baseline

Baseline

Baseline

Lowest Quintile Second Quintile Third Quintile Fourth Quintile Top Quintile All Addendum 80-90 90-95 95-99 Top 1 Percent Top 0.1 Percent

40,520 36,208 31,370 26,062 23,189 158,260

1.0 0.6 3.3 5.8 14.7 13.7

0.9 0.8 5.2 8.5 15.5 13.9

2.5 6.7 16.1 20.5 27.2 21.6

11,691 5,736 4,614 1,147 117

11.7 13.0 16.7 14.6 14.6

16.2 17.9 23.4 22.7 23.0

4.5 4.9 6.8 8.1 8.4

11.8 13.6 18.0 15.3 15.0

27.3 27.8 34.9 41.1 42.0

15.5 14.2 16.9 25.8 27.0

24.4 24.8 30.0 27.4 26.6

27.8 27.8 34.2 36.7 36.3

3.4 3.0 4.2 9.3 9.7

Source: Urban-Brookings Tax Policy Center Microsimulation Model (version 0412-7). Notes: Includes both filing and non-filing units but excludes those that are dependents of other tax units. Tax units with negative cash income are excluded from the lowest income class but are included in the totals. For a description of cash income, see http://www.taxpolicycenter.org/TaxModel/income.cfm . Effective marginal tax rates are weighted by the respective income source.

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Rationale for Ordering Used This analysis divides the tax increases into nine groups and ranks them based on our estimate of their likelihood of occurring. That ranking is obviously subjectiveno one knows what Congress and the president will do over coming months. But public discussion, proposals advanced by the two presidential candidates and members of Congress, and past congressional actions provide guidance in choosing the order used to analyze the different provisions. This analysis considers provisions in the following groups and order: 1. Payroll Tax. Neither presidential candidate has proposed extending the temporary payroll tax cut, and Congress has shown little interest in further economic stimulus. 2. Health Care Law Provisions. Tax increases on high-income households provide important funding for the expanded coverage provided in the 2010 healthcare legislation. They will take effect at the beginning of 2013 unless Congress delays or repeals them, but there appears little likelihood that the current Congress will do so. 3. High-Income Capital Gains and Dividends. President Obama has repeatedly proposed allowing the Bush-era tax cuts to expire for high-income taxpayers10 and the Democratic majority in the Senate has also supported allowing these provisions to expire; they could block an extension if they wanted to. But the Republicans support extension of all the tax cuts. This could occur again as part of a compromise, as it did at the end of 2010. 4. High-Income Rates, Pease, and PEP. These increases would also take place under the presidents repeated proposals, but the Republican majority in the House would defer or repeal them. 5. Stimulus Legislation EITC, CTC, and AOTC. These provisions are also controversial, but in the reverse direction. President Obama has proposed making them permanent, while both the Republican majority in the House of Representatives and candidate Mitt Romney would allow them to expire. 6. Extenders. Congress has repeatedly extended this group of short-term tax provisions. 7. Estate Tax. Although they differ markedly on specific values, President Obama and Republican and Democratic leaders in Congress all favor increasing the estate tax exemption and lowering the estate tax rate relative to what is scheduled to happen in 2013. 8. 2001/2003 Tax Provisions Primarily Affecting Low- and Middle-Income Households. President Obama has proposed extending the Bush-era tax cuts for all but the highestincome households and Republicans want to extend the cuts for everyone.11 9. Alternative Minimum Tax Patch. Congress has repeatedly enacted temporary increases in the AMT exemption to protect millions of taxpayers from paying the additional tax. The president has proposed an AMT patch in his budget, and Mitt Romney has proposed eliminating the AMT completely.

10

In his first three budgets, President Obama proposed to continue taxing qualified dividends the same as long-term capital gains. However, his 2013 budget proposed to revert to taxing all dividends the same as ordinary income for higher-income taxpayers. 11 These provisions include all those listed in box 1. The president would make those provisions permanent for married couples filing jointly with AGI under $250,000 and others with AGI under $200,000 (indexed for inflation from 2009).

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In summary, items 1 and 2 represent scheduled tax increases that are the most likely to occur the first is an expiring temporary tax cut that neither side has proposed to extend and the second is a key component of legislation that the president and his supporters are adamant about protecting. Items 3 through 5 are tax issues on which the two parties disagree, with Republicans favoring extension of items 3 and 4 and Democrats favoring extension of item 5. Items 6 and 7 are potential tax increases that both sides would most likely avoid, although they differ about details. Items 8 and 9 are potential tax increases that both sides want to prevent, although they could take place in the event of gridlock caused by disagreement on other tax proposals or on spending cuts. Revenue Effects Expiration of many tax provisions in 2013 would cause federal tax liability to jump by more than $500 billion in that year alone (table 4).12 That amount would represent more than a 20 percent increase in revenue, relative to the amount that would be collected if none of the provisions in the cliff took effect.

Table 4 Estimated Increases in Revenue by Tax Provisions, 2013 Provision 1. Payroll Tax 2. Health Care Law Provisions 3. High Income Capital Gains and Dividends 4. High Income Rates, Pease, and PEP 5. Stimulus Legislation EITC, CTC, and AOTC 6. Extenders 7. Estate Tax 8. Remainder of 2001-03 Tax Provisions 9. Alternative Minimum Tax Patch Total: Complete Fiscal Cliff Billions of Dollars 115 24 8 44 27 75 31 171 40 536 Percentage of Total 22 5 2 8 5 14 6 32 8 100

Source: Urban-Brookings Tax Policy Center Microsimulation Model (version 0412-7) and TPC calculations based on CBO and JCT estimates.

By itself, expiration of the 2 percentage point payroll tax cut would reduce workers paychecks by $115 billion in 2013. The new healthcare taxes would collect about $24 billion. Expiration of
12

The estimates in table 4 show effects on 2013 calendar year tax liability, but the timing of actual collections may vary. The effect on the timing of receipts will be influenced by many factors, including when and how Treasury decides to alter withholding schedules in the event tax cuts are not extended and on whether or not Congress decides to waive penalties for those who end up paying too little withholding or estimated tax in 2012 due to expiration of the AMT patch.

12

EGTRRA and JGTRRA tax cuts on the highest incomes would raise $52 billion in additional income taxes, about a sixth of that because of the increase in tax rates on long-term capital gains and dividends, but mostly because of the increase in the top two income tax rates and the return of Pease and PEP. Expiration of the remaining cuts from the 2009 stimulus bill would raise tax bills for low- and middle-income households by $27 billion. Expiration of the extenders would raise about $75 billion and the estate tax would bring in an additional $31 billion. Nearly a third of the total revenue increasejust over $170 billionwould come from expiration of the 2001/2003 tax cuts for low- and middle-incomes. Finally, not patching the AMT would raise $40 billion in 2013. Those estimates take into account short-term behavioral responses of taxpayers, who would report less taxable income and realize fewer capital gains because of the increase in marginal tax rates on ordinary income and capital gains. Those responses would be largest for the provisions affecting only high-income taxpayers (provisions 3 and 4 of table 4). For both these groups of provisions, the tax increase absent behavior would be larger than the estimates shown in table 4. Distributional Effects of Tax Changes The various tax components of the fiscal cliff would have markedly different effects on the distribution of the tax burden (figure 2 and tables 5 and 6). Some components would affect highincome taxpayers more than others. The new ACA taxes; expiration of tax cuts on high-income gains and dividends; expiration of high-income rates, Pease, and PEP; and expiration of

13

extenders would all primarily affect the top quintile of tax units and raise taxes most as a share of income at the very top of the distribution. The estate tax provisions would also affect high income taxpayers the most, but would raise effective tax rates about the same for different groups within the top quintile because their primary effect would be to lower the wealth threshold at which taxpayers become subject to the tax. The AMT provisions would raise taxes most as a share of income for tax units in the top two quintiles of the distribution, but would have little effect on the very highest income taxpayers, most of whom would continue to pay the regular tax even after expiration of the AMT patch.

Table 5 Change in Effective Tax Rates by Income Percentile, 2013 (percentage point change) Quintile Lowest 1. Payroll Tax 2. ACA Taxes 3. 2003 - High Incomes 4. 2001 - High Incomes 5. 2009 Provisions 6. Tax Extenders 7. Estate Tax 8. Rest of 2001-03 Cuts 9. AMT Patch All Provisions 1.1 0.0 0.0 0.0 1.9 0.3 0.0 0.5 0.0 3.7 Second 1.2 0.0 0.0 0.0 0.6 0.3 0.1 1.9 0.0 4.1 Middle 1.3 0.0 0.0 0.0 0.2 0.3 0.1 1.7 0.2 3.8 Fourth 1.4 0.0 0.0 0.0 0.1 0.3 0.2 1.7 0.5 4.2 Top 0.8 0.5 0.4 0.9 0.0 0.8 0.3 1.6 0.5 5.8

Tax Provisions

All

Top 1%

1.0 0.3 0.2 0.5 0.2 0.5 0.2 1.6 0.4 5.0

0.2 1.2 1.2 2.7 0.0 1.3 0.3 0.4 0.0 7.2

Source: Urban-Brookings Tax Policy Center Microsimulation Model (version 0412-7)

In contrast, expiration of the 2009 tax cuts would have the biggest impact on taxpayers at the bottom of the distribution, who would lose some benefits from refundable credits. Expiration of the payroll tax cuts would be slightly progressive through the bottom four quintiles, but would raise the effective tax rate least for the top quintile and, within the top quintiles, least at the very top. The highest-income taxpayers would experience a relatively smaller tax increase because, compared with other groups, they receive more of their income from capital returns than from wages and because much of their earnings is over the cap on earnings subject to the Social Security payroll tax and thus did not benefit from the 2 percent cut in that tax. Expiration of the 2001/2003 lower- and middle-income tax cuts (i.e., those not applying to high incomes) would primarily affect taxpayers in the middle three quintiles of the distribution and those in the top quintile, but not those at the very top. The highest-income taxpayers would experience some tax increase from the higher rates on the first $250,000 of their income, but measured as a share of income, that tax increase would be smaller than the average for all

14

taxpayers. The bottom quintile would experience some increase from the reduction in the child credit and the elimination of the 10 percent bracket, but many in that group would be unaffected because they would remain below or only slightly above relevant tax entry thresholds.

Table 6 Change in Average Tax Liability by Income Percentile, 2013 (change in dollars)

Tax Provisions Lowest 1. Payroll Tax 2. ACA Taxes 3. 2003 - High Incomes 4. 2001 - High Incomes 5. 2009 Provisions 6. Tax Extenders 7. Estate Tax 8. Rest of 2001-03 Cuts 9. AMT Patch All Provisions 120 0 0 0 209 28 3 53 0 412 Second 364 2 0 0 185 74 37 558 12 1,231

Quintile Middle 672 7 0 0 103 135 75 888 104 1,984 Fourth 1,135 13 0 0 73 267 158 1,453 440 3,540 Top 1,950 1,141 996 2,282 103 1,848 747 3,841 1,265 14,173

All

Top 1%

721 171 146 334 144 367 161 1,120 281

2,542 20,583 19,198 45,002 0 21,232 5,210 6,546 222

3,446 120,537

Source: Urban-Brookings Tax Policy Center Microsimulation Model (version 0412-7)

If all the scheduled increases take effect, the top 1 percent would experience the largest tax increase as a share of income7.2 percent, or an average of over $120,000 per taxpayer. More than half of that increase3.8 percent would come from expiration of the 2001/2003 tax cuts and another 2.5 percent from expiration of the extenders and the beginning of the new ACA taxes. At the other end of the distribution, the bottom quintile would see its effective tax rate rise by 3.7 percent of incomemostly because of expiration of the 2009 tax cuts (1.9 percent of income) and the payroll tax cut (1.1 percent of income). The 3.8 percentage point tax rate increase for the middle quintile would also come mostly from two components of the fiscal cliffexpiration of the majority of the 2001/2003 tax cuts (1.7 percent of income) and expiration of the payroll tax cut (1.3 percent of income). Taxpayers Affected Almost 90 percent of households would experience a tax increase if all the fiscal cliff provisions took effect as scheduled, including almost all tax units in the top 60 percent of the income

15

distribution (table 7).13 Only about two-thirds of taxpayers in the bottom quintile would see their taxes rise, however, most of them because of the expiration of the payroll tax cut. That cut (which would affect 77 percent of all households) and expiration of the 2001/2003 tax cuts at incomes below $250,000 (71 percent) would be the two single components of the fiscal cliff that would affect the largest numbers of tax units. In contrast, relatively few tax units would be affected by the ACA taxes (5 percent), the 2001/2003 cuts for high-income capital gains and dividends (1 percent), other high-income provisions (1 percent), the estate tax (less than half of 1 percent), and certain individual extenders (9 percent).

Table 7 Tax Units Affected by Income Percentile, 2013 (percent of tax units) Quintile Lowest 1. Payroll Tax 2. ACA Taxes 3. 2003 - High Incomes 4. 2001 - High Incomes 5. 2009 Provisions 6. Tax Extenders 7. Estate Tax 8. Rest of 2001-03 Cuts 9. AMT Patch All Provisions 62.4 0.4 0.0 0.0 22.4 0.7 0.0 20.9 0.0 67.1 Second 74.7 2.5 0.0 0.0 19.6 4.1 * 74.8 1.4 88.5 Middle 81.0 4.7 0.0 0.0 13.5 9.6 * 92.4 8.4 98.6 Fourth 85.8 5.1 0.0 0.0 7.9 17.8 0.1 98.2 28.2 99.8 Top 89.5 18.1 6.8 7.3 7.6 21.9 0.1 97.7 47.8 99.9 76.6 5.1 1.0 1.1 15.4 9.2 * 71.3 13.6 88.4 90.2 98.9 81.1 81.6 * 1.2 0.3 88.8 5.5 100.0

Tax Provisions

All

Top 1%

Source: Urban-Brookings Tax Policy Center Microsimulation Model (version 0412-7) * Less than 0.05

Some of these components of the fiscal cliff, however, would affect mostly very high-income taxpayers. Within the top 1 percent, the ACA taxes would affect 99 percent of returns and expiration of the 2001/2003 tax cuts for high-income taxpayers would affect 81 percent of returns. Expiration of the AMT patch would affect 14 percent of tax units overall and 48 percent of taxpayers in the top quintile, but less than 6 percent of taxpayers in the top 1 percent.

13

This analysis of how many people would be affected by the fiscal cliff omits many of the extenders. Expiration of extenders related to corporate income would affect almost all taxpayers through lower earnings and investment income. Some of the individual extenders, such as the adoption credit, would affect a relatively small number of returns but we have no way to identify which returns and how much those returns would be affected by other provisions. Table 7 thus includes only those extenders for which it is possible to assign benefits to the representative tax units in TPCs microsimulation tax model.

16

Encouraging Investors to Realize Capital Gains Early One implication of increasing marginal tax rates is that some investors would have an incentive to sell appreciated stocks, bonds, and other assets before the end of the year, if they believe the capital gains rate will go up as scheduled and then remain in place for tax year 2013. In 2012, investors face a top marginal tax rate of 15 percent on long-term capital gains.14 That rate is scheduled to increase to 20 percent in 2013. The new ACA tax on unearned income would add another 3.8 percent for high-income investors (couples with AGI over $250,000 and others with AGI over $200,000, with no indexing for inflation). And the newly reinstated Pease limitation on itemized deductions for high-income taxpayers (those with AGI over $177,550 in 2013, indexed for inflation) would add as much as another 1.2 percent.15 In combination, these changes would increase the effective marginal tax rate on capital gains for many high-income investors from 15 percent this year to at least 23.8 percent and as high as 25 percent next year. For that reason, the average effective marginal rate on capital gains for all taxpayers in the top quintile would increase from 14.7 percent to 22.3 percent. In anticipation of that increase, investors may choose to sell some appreciated assets in late 2012. That is exactly what happened following the enactment of the Tax Reform Act of 1986, which increased the top capital gains tax rate from 20 percent to 28 percent. Capital gains realizations almost doubled in 1986 and then fell back in 1987 as investors rushed to take advantage of the soon-to-expire 20 percent rate (Auten 1999). Similar behavior is likely this year unless investors believe that the scheduled tax increases will be averted.

14

Taxpayers in the exemption phaseout range of the AMT face a marginal rate of 18.75 percent. For those taxpayers, an additional dollar of long-term capital gains reduces the AMT exemption by 25 cents, thus adding to the 15-percent statutory rate. 15 An affected investor who realizes an additional dollar of capital gains would lose 3 cents of itemized deductions; an investor in the 39.6 percent bracket would thus lose 1.2 cents39.6 percent of 3 cents. Pease would increase marginal tax rates less for investors in lower tax brackets.

17

References Auten, Gerald. 1999. Capital Gains Taxation. In The Encyclopedia of Taxation and Tax Policy, edited by Joseph J. Cordes, Robert D. Ebel, and Jane G. Gravelle Washington, DC: Urban Institute Press. Congressional Budget Office. 2012a. Economic Effects of Reducing the Fiscal Restraint that is Scheduled to Occur in 2013. Washington, DC: Congressional Budget Office. May 22. ___. 2012b. An Update to the Budget and Economic Outlook: Fiscal Years 2012 to 2022. Washington, DC: Congressional Budget Office. August 22. Description of the Tax Policy Centers Microsimulation Model The Tax Policy Center employs a large-scale microsimulation model to develop revenue and distribution estimates of the U.S. federal tax system. Based primarily on a public-use sample of information taken from tax returns, the model projects incomes and other tax-related variables for subsequent years and simulates actual and proposed tax laws to estimate and compare their effects on tax units. The model is similar to those used by the Congressional Budget Office, the Joint Committee on Taxation, and the Treasury's Office of Tax Analysis. A detailed description of TPCs microsimulation model is available at http://taxpolicycenter.org/taxtopics/TPC-Model-Overview-2012.cfm

18

APPENDIX TABLES

19

Note: This table includes only those extenders for which it is possible to assign benefits to the representative tax units in TPCs microsimulation model; see footnote 13 on page16.
Percent of Tax Units Affecte d and Average Tax Change by Cash Income Percentile, 2013
Tax Units Cash Income Percentile Complete Fiscal Cliff Number (thousands) Percent of Total Percent within Class Avg Tax Increase ($) Tax Units with a Tax Increase 1. Payroll Tax Percent within Class Avg Tax Increase ($) 2. Health Care Provisions Percent within Class Avg Tax Increase ($)

Lowest Quintile Second Quintile Middle Quintile Fourth Quintile Top Quintile All Addendum 80-90 90-95 95-99 Top 1 Percent Top 0.1 Percent

40,520 36,208 31,370 26,062 23,189 158,260

25.6 22.9 19.8 16.5 14.7 100.0

67.1 88.5 98.6 99.8 99.9 88.4

590 1,327 1,942 3,415 12,964 3,637

62.4 74.7 81.0 85.8 89.5 76.6

192 487 830 1,324 2,179 942

0.4 2.5 4.7 5.1 18.1 5.1

43 80 151 260 6,311 3,360

11,692 5,736 4,615 1,147 117

7.4 3.6 2.9 0.7 0.1

100.0 100.0 99.7 100.0 100.0

6,162 7,830 14,085 103,445 532,351

89.2 90.2 89.0 90.2 90.6

1,902 2,297 2,572 2,820 2,940

5.0 4.2 48.5 98.9 99.7

464 614 1,088 20,807 119,037

Cash Income Percentile

3. High Income Capital Gains and Dividends Percent within Class Avg Tax Increase ($)

Tax Units with a Tax Increase 4. High Income Rates, 5. 2009 EITC, CTC, and Pease, and PEP Education Provisions Percent within Class Avg Tax Increase ($) Percent within Class Avg Tax Increase ($)

6. Tax Extenders Percent within Class Avg Tax Increase ($)

Lowest Quintile Second Quintile Middle Quintile Fourth Quintile Top Quintile All Addendum 80-90 90-95 95-99 Top 1 Percent Top 0.1 Percent

0.0 0.0 0.0 0.0 6.8 1.0

0 0 0 0 14,566 14,566

0.0 0.0 0.0 0.0 7.3 1.1

0 0 0 0 31,093 31,093

22.4 19.6 13.5 7.9 7.6 15.4

934 943 762 928 1,349 937

0.7 4.1 9.6 17.8 21.9 9.2

63 121 149 245 433 275

0.0 0.1 14.1 81.1 92.6

0 846 1,662 23,684 133,620

0.0 0.1 16.5 81.6 90.0

0 149 1,695 55,158 281,328

10.2 9.7 0.4 * *

1,123 1,843 1,078 ** **

23.7 30.9 11.3 1.2 0.3

397 475 488 129 121

Cash Income Percentile

7. Estate Tax Percent within Class Avg Tax Increase ($)

Tax Units with a Tax Increase 8. Remainder of 2001-03 Tax Provisions Percent within Class Avg Tax Increase ($)

9. Alternative Minimum Tax Percent within Class Avg Tax Increase ($)

Lowest Quintile Second Quintile Middle Quintile Fourth Quintile Top Quintile All Addendum 80-90 90-95 95-99 Top 1 Percent Top 0.1 Percent
* Less than 0.05

0.0 * * 0.1 0.1 *

0 ** ** 420,493 1,021,626 **

20.9 74.8 92.4 98.2 97.7 71.3

255 746 961 1,479 3,973 1,579

0.0 1.4 8.4 28.2 47.8 13.6

0 861 1,231 1,563 2,657 2,069

0.1 0.1 0.2 0.3 0.5

495,156 736,449 1,143,538 2,063,900 3,910,597

98.9 99.0 95.4 88.8 74.9

2,934 3,857 5,850 8,292 10,385

44.5 43.4 72.3 5.5 0.2

2,126 2,030 3,923 4,259 2,658

** Insufficient data to calculate an average

Source: Urban-Brookings Tax Policy Center Microsimulation Model (version 0412-7). Notes: Includes both filing and non-filing units but excludes those that are dependents of other tax units. Tax units with negative cash income are excluded from the lowest income class but are included in the totals. For a description of cash income, see http://www.taxpolicycenter.org/TaxModel/income.cfm . The income percentile classes used in this table are based on the income distribution for the entire population and contain an equal number of people, not tax units. The breaks are (in 2012 dollars): 20% $20,113; 40% $39,790; 60% $64,484; 80% $108,266; 90% $143,373; 95% $204,296; 99% $506,210; 99.9% $2,655,675.

20

Step 1 of 9: Allow Payroll Tax Cut to Expire Distribution of Federal Tax Change by Cash Income Percentile, 2013
Tax Units Cash Income Percentile Number (thousands) Percent of Total Share of Total Federal Tax Change Average Federal Tax Rate Change (% points) After Step 1 (percent)

Percent Change in After-Tax Income

Average Federal Tax Change (dollars)

Lowest Quintile Second Quintile Middle Quintile Fourth Quintile Top Quintile All Addendum 80-90 90-95 95-99 Top 1 Percent Top 0.1 Percent

40,520 36,208 31,370 26,062 23,189 158,260

25.6 22.9 19.8 16.5 14.7 100.0

-1.1 -1.3 -1.5 -1.6 -1.1 -1.3

4.3 11.6 18.5 25.9 39.6 100.0

120 364 672 1,135 1,950 721

1.1 1.2 1.3 1.4 0.8 1.0

1.7 9.3 15.3 18.7 25.9 20.4

11,692 5,736 4,615 1,147 117

7.4 3.6 2.9 0.7 0.1

-1.7 -1.6 -1.1 -0.2 -0.1

17.4 10.4 9.3 2.6 0.3

1,697 2,073 2,290 2,542 2,663

Proposal: 4.0

1.4 1.2 0.8 0.2 0.0

21.2 23.0 25.5 31.4 32.6

Number of AMT Taxpayers (millions). Baseline: 4.0

Step 2 of 9: Allow Health Care Law Related Taxes to Take Effect Distribution of Federal Tax Change by Cash Income Percentile, 2013
Tax Units Cash Income Percentile Number (thousands) Percent of Total Share of Total Federal Tax Change Average Federal Tax Rate Change (% points) After Step 2 (percent)

Percent Change in After-Tax Income

Average Federal Tax Change (dollars)

Lowest Quintile Second Quintile Middle Quintile Fourth Quintile Top Quintile All Addendum 80-90 90-95 95-99 Top 1 Percent Top 0.1 Percent

40,520 36,208 31,370 26,062 23,189 158,260

25.6 22.9 19.8 16.5 14.7 100.0

0.0 0.0 0.0 0.0 -0.6 -0.3

0.0 0.3 0.8 1.3 97.6 100.0

0 2 7 13 1,141 171

0.0 0.0 0.0 0.0 0.5 0.3

1.7 9.3 15.3 18.8 26.4 20.7

11,692 5,736 4,615 1,147 117

7.4 3.6 2.9 0.7 0.1

0.0 0.0 -0.3 -1.8 -2.2

1.0 0.5 9.0 87.1 51.1

23 26 528 20,583 118,720

Proposal: 4.0

0.0 0.0 0.2 1.2 1.5

21.2 23.0 25.7 32.6 34.1

Number of AMT Taxpayers (millions). Baseline: 4.0

Source: Urban-Brookings Tax Policy Center Microsimulation Model (version 0412-7). Notes: Includes both filing and non-filing units but excludes those that are dependents of other tax units. Tax units with negative cash income are excluded from the lowest income class but are included in the totals. For a description of cash income, see http://www.taxpolicycenter.org/TaxModel/income.cfm . The income percentile classes used in this table are based on the income distribution for the entire population and contain an equal number of people, not tax units. The breaks are (in 2012 dollars): 20% $20,113; 40% $39,790; 60% $64,484; 80% $108,266; 90% $143,373; 95% $204,296; 99% $506,210; 99.9% $2,655,675.

21

Step 3 of 9: Allow 2003 Tax Cuts on Capital Gains & Dividends to Expire for High Incomes Distribution of Federal Tax Change by Cash Income Percentile, 2013
Tax Units Cash Income Percentile Number (thousands) Percent of Total Share of Total Federal Tax Change Average Federal Tax Rate Change (% points) After Step 3 (percent)

Percent Change in After-Tax Income

Average Federal Tax Change (dollars)

Lowest Quintile Second Quintile Middle Quintile Fourth Quintile Top Quintile All Addendum 80-90 90-95 95-99 Top 1 Percent Top 0.1 Percent

40,520 36,208 31,370 26,062 23,189 158,260

25.6 22.9 19.8 16.5 14.7 100.0

0.0 0.0 0.0 0.0 -0.6 -0.3

0.0 0.0 0.0 0.0 100.0 100.0

0 0 0 0 996 146

0.0 0.0 0.0 0.0 0.4 0.2

1.7 9.3 15.3 18.8 26.8 20.9

11,692 5,736 4,615 1,147 117

7.4 3.6 2.9 0.7 0.1

0.0 0.0 -0.1 -1.7 -2.4

0.0 0.0 4.7 95.3 62.5

0 1 235 19,198 123,786

Proposal: 4.0

0.0 0.0 0.1 1.2 1.6

21.2 23.0 25.8 33.7 35.7

Number of AMT Taxpayers (millions). Baseline: 4.0

Step 4 of 9: Allow 2001 Tax Cuts to Expire for High Incomes Distribution of Federal Tax Change by Cash Income Percentile, 2013
Tax Units Cash Income Percentile Number (thousands) Percent of Total Share of Total Federal Tax Change Average Federal Tax Rate Change (% points) After Step 4 (percent)

Percent Change in After-Tax Income

Average Federal Tax Change (dollars)

Lowest Quintile Second Quintile Middle Quintile Fourth Quintile Top Quintile All Addendum 80-90 90-95 95-99 Top 1 Percent Top 0.1 Percent

40,520 36,208 31,370 26,062 23,189 158,260

25.6 22.9 19.8 16.5 14.7 100.0

0.0 0.0 0.0 0.0 -1.3 -0.6

0.0 0.0 0.0 0.0 100.0 100.0

0 0 0 0 2,282 334

0.0 0.0 0.0 0.0 0.9 0.5

1.7 9.3 15.3 18.8 27.8 21.4

11,692 5,736 4,615 1,147 117

7.4 3.6 2.9 0.7 0.1

0.0 0.0 -0.1 -4.1 -4.9

0.0 0.0 2.4 97.6 55.8

0 0 280 45,002 253,262

Proposal: 3.3

0.0 0.0 0.1 2.7 3.2

21.2 23.0 25.9 36.4 38.8

Number of AMT Taxpayers (millions). Baseline: 4.0

Source: Urban-Brookings Tax Policy Center Microsimulation Model (version 0412-7). Notes: Includes both filing and non-filing units but excludes those that are dependents of other tax units. Tax units with negative cash income are excluded from the lowest income class but are included in the totals. For a description of cash income, see http://www.taxpolicycenter.org/TaxModel/income.cfm . The income percentile classes used in this table are based on the income distribution for the entire population and contain an equal number of people, not tax units. The breaks are (in 2012 dollars): 20% $20,113; 40% $39,790; 60% $64,484; 80% $108,266; 90% $143,373; 95% $204,296; 99% $506,210; 99.9% $2,655,675.

22

Step 5 of 9: Allow 2009 Tax Cuts to Expire Distribution of Federal Tax Change by Cash Income Percentile, 2013
Tax Units Cash Income Percentile Number (thousands) Percent of Total Share of Total Federal Tax Change Average Federal Tax Rate Change (% points) After Step 5 (percent)

Percent Change in After-Tax Income

Average Federal Tax Change (dollars)

Lowest Quintile Second Quintile Middle Quintile Fourth Quintile Top Quintile All Addendum 80-90 90-95 95-99 Top 1 Percent Top 0.1 Percent

40,520 36,208 31,370 26,062 23,189 158,260

25.6 22.9 19.8 16.5 14.7 100.0

-1.9 -0.7 -0.2 -0.1 -0.1 -0.3

37.1 29.4 14.2 8.4 10.5 100.0

209 185 103 73 103 144

1.9 0.6 0.2 0.1 0.0 0.2

3.5 9.9 15.5 18.8 27.8 21.6

11,692 5,736 4,615 1,147 117

7.4 3.6 2.9 0.7 0.1

-0.1 -0.1 0.0 0.0 0.0

5.9 4.5 0.1 0.0 0.0

115 179 4 0 0
Proposal: 3.3

0.1 0.1 0.0 0.0 0.0

21.3 23.1 25.9 36.4 38.8

Number of AMT Taxpayers (millions). Baseline: 3.3

Step 6 of 9: Allow Tax Extenders to Expire Distribution of Federal Tax Change by Cash Income Percentile, 2013
Tax Units Cash Income Percentile Number (thousands) Percent of Total Share of Total Federal Tax Change Average Federal Tax Rate Change (% points) After Step 6 (percent)

Percent Change in After-Tax Income

Average Federal Tax Change (dollars)

Lowest Quintile Second Quintile Middle Quintile Fourth Quintile Top Quintile All Addendum 80-90 90-95 95-99 Top 1 Percent Top 0.1 Percent

40,520 36,208 31,370 26,062 23,189 158,260

25.6 22.9 19.8 16.5 14.7 100.0

-0.3 -0.3 -0.3 -0.4 -1.1 -0.7

1.9 4.6 7.3 12.0 73.7 100.0

28 74 135 267 1,848 367

0.3 0.3 0.3 0.3 0.8 0.5

3.8 10.1 15.8 19.2 28.6 22.1

11,692 5,736 4,615 1,147 117

7.4 3.6 2.9 0.7 0.1

-0.5 -0.6 -0.9 -2.0 -2.4

9.2 8.2 14.5 41.9 23.7

459 826 1,821 21,232 118,151

Proposal: 3.3

0.4 0.5 0.6 1.3 1.5

21.7 23.6 26.5 37.7 40.3

Number of AMT Taxpayers (millions). Baseline: 3.3

Source: Urban-Brookings Tax Policy Center Microsimulation Model (version 0412-7). Notes: Includes both filing and non-filing units but excludes those that are dependents of other tax units. Tax units with negative cash income are excluded from the lowest income class but are included in the totals. For a description of cash income, see http://www.taxpolicycenter.org/TaxModel/income.cfm . The income percentile classes used in this table are based on the income distribution for the entire population and contain an equal number of people, not tax units. The breaks are (in 2012 dollars): 20% $20,113; 40% $39,790; 60% $64,484; 80% $108,266; 90% $143,373; 95% $204,296; 99% $506,210; 99.9% $2,655,675.

23

Step 7 of 9: Allow Estate Tax to Revert to Pre-2001 Law Distribution of Federal Tax Change by Cash Income Percentile, 2013
Tax Units Cash Income Percentile Number (thousands) Percent of Total Share of Total Federal Tax Change Average Federal Tax Rate Change (% points) After Step 7 (percent)

Percent Change in After-Tax Income

Average Federal Tax Change (dollars)

Lowest Quintile Second Quintile Middle Quintile Fourth Quintile Top Quintile All Addendum 80-90 90-95 95-99 Top 1 Percent Top 0.1 Percent

40,520 36,208 31,370 26,062 23,189 158,260

25.6 22.9 19.8 16.5 14.7 100.0

0.0 -0.1 -0.2 -0.2 -0.4 -0.3

0.5 5.3 9.3 16.2 68.2 100.0

3 37 75 158 747 161

0.0 0.1 0.1 0.2 0.3 0.2

3.8 10.2 15.9 19.3 28.9 22.3

11,692 5,736 4,615 1,147 117

7.4 3.6 2.9 0.7 0.1

-0.2 -0.4 -0.6 -0.5 -0.4

10.1 10.6 24.0 23.5 7.6

219 469 1,323 5,210 16,509

Proposal: 3.3

0.2 0.3 0.5 0.3 0.2

21.9 23.9 27.0 38.0 40.5

Number of AMT Taxpayers (millions). Baseline: 3.3

Step 8 of 9: Allow Remaining 2001/2003 Tax Cuts to Expire Distribution of Federal Tax Change by Cash Income Percentile, 2013
Tax Units Cash Income Percentile Number (thousands) Percent of Total Share of Total Federal Tax Change Average Federal Tax Rate Change (% points) After Step 8 (percent)

Percent Change in After-Tax Income

Average Federal Tax Change (dollars)

Lowest Quintile Second Quintile Middle Quintile Fourth Quintile Top Quintile All Addendum 80-90 90-95 95-99 Top 1 Percent Top 0.1 Percent

40,520 36,208 31,370 26,062 23,189 158,260

25.6 22.9 19.8 16.5 14.7 100.0

-0.5 -2.1 -2.0 -2.1 -2.2 -2.1

1.2 11.4 15.7 21.4 50.2 100.0

53 558 888 1,453 3,841 1,120

0.5 1.9 1.7 1.7 1.6 1.6

4.3 12.1 17.6 21.1 30.4 23.9

11,692 5,736 4,615 1,147 117

7.4 3.6 2.9 0.7 0.1

-3.0 -3.0 -2.7 -0.6 0.0

19.1 12.4 14.5 4.2 0.1

2,900 3,816 5,582 6,546 869

Proposal: 1.2

2.3 2.3 1.9 0.4 0.0

24.2 26.2 28.9 38.4 40.5

Number of AMT Taxpayers (millions). Baseline: 3.3

Source: Urban-Brookings Tax Policy Center Microsimulation Model (version 0412-7). Notes: Includes both filing and non-filing units but excludes those that are dependents of other tax units. Tax units with negative cash income are excluded from the lowest income class but are included in the totals. For a description of cash income, see http://www.taxpolicycenter.org/TaxModel/income.cfm . The income percentile classes used in this table are based on the income distribution for the entire population and contain an equal number of people, not tax units. The breaks are (in 2012 dollars): 20% $20,113; 40% $39,790; 60% $64,484; 80% $108,266; 90% $143,373; 95% $204,296; 99% $506,210; 99.9% $2,655,675.

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Step 9 of 9: Allow AMT Patch to Expire Distribution of Federal Tax Change by Cash Income Percentile, 2013
Tax Units Cash Income Percentile Number (thousands) Percent of Total Share of Total Federal Tax Change Average Federal Tax Rate Change (% points) After Step 9 (percent)

Percent Change in After-Tax Income

Average Federal Tax Change (dollars)

Lowest Quintile Second Quintile Middle Quintile Fourth Quintile Top Quintile All Addendum 80-90 90-95 95-99 Top 1 Percent Top 0.1 Percent

40,520 36,208 31,370 26,062 23,189 158,260

25.6 22.9 19.8 16.5 14.7 100.0

0.0 0.0 -0.2 -0.7 -0.7 -0.5

0.0 1.0 7.3 25.8 65.9 100.0

0 12 104 440 1,265 281

0.0 0.0 0.2 0.5 0.5 0.4

4.3 12.1 17.8 21.6 30.9 24.3

11,692 5,736 4,615 1,147 117

7.4 3.6 2.9 0.7 0.1

-1.0 -0.7 -1.4 0.0 0.0

24.9 11.4 29.1 0.6 0.0

946 881 2,809 222 -14

Proposal: 21.7

0.8 0.5 1.0 0.0 0.0

24.9 26.7 29.9 38.4 40.5

Number of AMT Taxpayers (millions). Baseline: 1.2

Complete Fiscal Cliff Distribution of Federal Tax Change by Cash Income Percentile, 2013
Tax Units Cash Income Percentile Number (thousands) Percent of Total Share of Total Federal Tax Change Average Federal Tax Rate Change (% points) Complete Fiscal Cliff (percent)

Percent Change in After-Tax Income

Average Federal Tax Change (dollars)

Lowest Quintile Second Quintile Middle Quintile Fourth Quintile Top Quintile All Addendum 80-90 90-95 95-99 Top 1 Percent Top 0.1 Percent

40,520 36,208 31,370 26,062 23,189 158,260

25.6 22.9 19.8 16.5 14.7 100.0

-3.7 -4.5 -4.4 -5.1 -7.7 -6.2

3.1 8.2 11.4 16.9 60.3 100.0

412 1,231 1,984 3,540 14,173 3,446

3.7 4.1 3.8 4.2 5.8 5.0

4.3 12.1 17.8 21.6 30.9 24.3

11,692 5,736 4,615 1,147 117

7.4 3.6 2.9 0.7 0.1

-6.3 -6.3 -6.9 -10.5 -11.8

13.6 8.7 12.6 25.4 13.6

6,359 8,271 14,871 120,537 633,946

Proposal: 21.7

5.1 5.0 5.2 7.2 7.9

24.9 26.7 29.9 38.4 40.5

Number of AMT Taxpayers (millions). Baseline: 4.0

Source: Urban-Brookings Tax Policy Center Microsimulation Model (version 0412-7). Notes: Includes both filing and non-filing units but excludes those that are dependents of other tax units. Tax units with negative cash income are excluded from the lowest income class but are included in the totals. For a description of cash income, see http://www.taxpolicycenter.org/TaxModel/income.cfm . The income percentile classes used in this table are based on the income distribution for the entire population and contain an equal number of people, not tax units. The breaks are (in 2012 dollars): 20% $20,113; 40% $39,790; 60% $64,484; 80% $108,266; 90% $143,373; 95% $204,296; 99% $506,210; 99.9% $2,655,675.

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